The Appian Fund returned –0.43% in June as performance was mixed across managers. The Fund’s Event Driven, Macro and Structured Credit managers contributed positively to performance in June, while the Fund’s Relative Value Arbitrage manager suffered a drawdown during a period of extremely low volatility.
Economic and Financial Market Overview
Investors continued to shrug off both world and market events in June. The specter of two wars globally, as well as a sharp downward revision of first quarter GDP to -2.9%, was not enough to dampen investor appetite for U.S. Equities. The Wilshire 5000 rallied 2.45% in June. The advance in U.S. stocks has been somewhat uneven, with large capitalization stocks significantly outperforming small capitalization stocks in 2014. In fact, as of this writing, small cap stocks were in negative territory for the year.
Investors also continue to seek exposure to U.S. Treasuries, with the long end of the yield curve flattening during the second quarter. The 10-year treasury began the second quarter yielding 2.7% and ended it yielding 2.5%. While 2.5% is certainly low, on a relative basis the U.S. Treasury may appeal to an investor when comparing it to 10-Year Spanish or Greek debt, currently yielding 2.6% and 6.2%, respectively.
Hedge Funds produced generally positive results in June. Event Driven strategies capitalized on a strong environment for mergers and acquisitions and other corporate activity, returning 1.27% in June. Equity Hedge strategies also rode the equity market’s steady rise to a strong return in June.
Appian Fund Performance and Positioning
The Appian Fund returned -0.43% in June, driven by losses in the Fund’s Relative Value Arbitrage strategy. Over the last 23 trading days, volatility across most of the manager’s exposures hit new lows for the cycle. The VIX averaged 11.5 over the course of June, down 8.7% versus May, producing yet another low point for the VIX in this cycle. Since 1990, the VIX has closed below 12 less than 2% of the time, marking June as an outlier in the standard deviation of VIX closes. While challenging for the manager’s strategy that the VIX is more than 20% below its 50 day moving average, that very trend also suggests that an increase in volatility is increasingly likely. We continue to believe that the programmatic removal of Federal Reserve stimulus will lead to price discovery and increased volatility.
On the positive side of the ledger, the Fund’s two Event Driven managers contributed positively to returns in June. The Event Driven Multi-Strategy manager maintains a significant weighting to mergers and acquisitions (46% of their portfolio), and, as stated earlier, the current environment for M&A activity is very positive. Over $2 trillion of deals have been announced thus far in 2014, a 75% increase over the comparable period in 2013. The Fund’s Event Driven–Distressed manager also produced gains in June, led by their position in Greek Bank debt and a basket of Venezuelan assets, including bonds, sovereign debt, the national electric company and the national oil company. As you might conclude, the two managers pursue entirely different strategies in their pursuit of returns, a fact we consider to be a positive in overall portfolio construction.
The Fund’s Structured Credit manager also performed well in June as a bullish tone was present in Asset Backed and High Yield markets. The bulk of the manager’s portfolio is invested in pre-credit crisis, non-Agency, seasoned RMBS, and that trade has been very profitable for the Appian Fund’s manager since their debut in the portfolio in September 2012. That said, superior prospective returns may be found in the CMBS market, and the manager has been rotating their portfolio somewhat in that direction.
Below please find attribution for the Appian Fund for the month of June.
|Attribution by Strategy
|Event Driven – Special Situations
|U.S. Long/Short Equity
|Relative Value Arbitrage
We hope you are enjoying your summer, and please do call us anytime. We appreciate your interest in the Appian Fund.